i. Use the Taylor rule to determine the appropriate setting of the overnight interest rate if the
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Question:
i. Use the Taylor rule to determine the appropriate setting of the overnight interest rate if the current
inflation is 4%, equilibrium overnight interest rate is 2%, target inflation is 2% and there is a
positive output gap of 2%.
ii. Using the Taylor rule, explain how should Bank of Canada change the target for overnight
interest rate if economy sees potential real GDP growing at a pace faster than the current GDP.
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